Repo rate raised by 25 basis points; India Inc sulks as loans will cost more.
The interest rate hike season is set to get longer, with the Reserve Bank of India (RBI) on Friday maintaining its strong anti-inflationary stance. While Friday’s 25 basis points increase in the repo rate that took the policy rate to 8.25 per cent was widely expected, what disappointed industry and markets was the central bank’s continued hawkish tone.
The general expectation is the RBI is far from the pause button as it is concerned about the still elevated level of global commodity prices. The central bank pointed out there was still an element of suppressed inflation in the economy despite the recent adjustment in domestic fuel prices.
The RBI statement also voiced concern that food inflation may not ease as much as expected. While it sees inflation pressures easing in the latter part of FY12 in response to the lagged effect of monetary tightening, the RBI is clearly worried that inflation expectations will rise. That is why it considers it “imperative to persevere with the current anti-inflationary stance.”
HDFC Bank’s chief economist Abheek Barua said while the move was largely expected, the lack of dilution in the RBI’s hawkishness and its unflinching resolve to maintain an anti-inflationary stance was surprising.
Headline inflation for August was 9.8 per cent. It has remained near the double-digit mark for more than a year. The RBI says inflation may only come down in the latter part of 2011-12 as it projects March-end inflation at seven per cent. Finance minister Pranab Mukherjee said the RBI would help bring down inflation to a more comfortable level, but acknowledged the monetary tightening had hurt economic growth.
But economists said with international commodity and crude oil prices staying at elevated levels and the pass-through of yesterday’s petrol price rise still to come, inflation may not come down in the near future, raising fears the RBI may hike rates by 25 bps again in its October policy. The petrol price hike would directly impact inflation by seven bps apart from its indirect impact, which would come with a lag, the RBI said.
The central bank has raised the policy rate by 350 basis points in 12 rounds spread over 18 months, the most rapid in the central bank’s history. Rate hikes in India continue amidst other emerging economies like China and South Korea opting for a pause and Brazil even going for a cut.
“RBI sounded more hawkish than what the market expected. We expect another 25 bps rate hike in the October review,” said Samiran Chakraborty, head of research at Standard Chartered Bank.
That’s not something bankers are happy about. Most said increasing loan rates was inevitable after the latest rate hike, though they added monetary transmission happened with a lag. “Yes, banks will pass on the interest rate hike to customers. This is what RBI wants banks to do. However, a rate hike may not happen immediately,” said A Krishna Kumar, managing director of State Bank of India.
Bankers said the trigger to hike would come from the deposit front. However, with deposit mobilisation gathering pace, there may not be any immediate need to hike deposit rates further, unless loan demand picks up. With banks entering the busy season, there is hope the loan demand, which has been slack in the current financial year so far, may pick up.
The prospects of a further increase in lending rates united corporate India in its opposition to the continued increase in rates. Confederation of Indian Industry president B Muthuraman said going by earlier experiences of a policy-induced slowdown, it may be difficult to emerge from such a phase. In that case, GDP growth of eight per cent may not be achievable not only in the current year but also in the coming year. RPG Enterprises chairman Harsh Goenka said the fresh blow was avoidable. "Growth is clearly showing signs of being impacted with successive monetary policy actions and a severely challenging global economic situation; this fresh blow from RBI was avoidable,” he added.
| INDIA A DIFFERENT BRIC IN THE WALL Monetary action across economies |
| Australia........... 4.75% Last hike in November 2010 |
| Brazil............. 12.00% Cut rate in August 2011 |
| China............. 6.56% Last hike in July 2011 |
| England........... 0.50% Cut rate in March 2009 |
| Indonesia.......... 6.75% Last hike in February 2011 |
| South Korea......... 3.25% Last hike in June 2011 |
| Malaysia............ 3.00% Last hike in May 2011 |
| Philippines........... 4.50% Last hike in May 2011 |
| United States......... 0.25% Cut rate in December 2008 |
The markets were also disappointed. Shares closed higher on Friday, but pared most of their intra-day gains after the RBI decision. The Bombay Stock Exchange's Sensitive Index rose 0.3 per cent to close at 16,933.83. It had gained as much as 1.45 per cent during the day.
